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 Edexcel
REVISE PEARSON EDEXCEL GCSE (9–1)

Business
REVISION
GUIDE
Series Consultant: Harry Smith
Author: Andrew Redfern

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 1-to-1
page
matc
h wit
the B h
usine

Contents
Revis ss
ion W
ISBN orkbo
97812 ok
9
21907
09

Theme 1: Investigating Theme 2: Building a business

small business 49 Business growth
1 The dynamic nature of business 50 Public limited companies (PLCs)
2 Risk and reward 51 Financing growth
3 The role of business enterprise 52 Why business objectives change
4 The importance of added value 53 How business objectives change
5 The role of entrepreneurship 54 Business and globalisation
6 Customer needs 1 55 International trade
7 Customer needs 2 56 Competing internationally
8 The role of market research 57 Ethics and business
9 Types of market research 58 Environmental issues
10 Market research data 59 Product 1
11 Market segmentation 60 Product 2
12 Market mapping 61 The importance of price
13 Competition 62 Pricing strategies
14 Competitive markets 63 Promotion
15 Aims and objectives 64 Promotion, branding and technology
16 Differing aims and objectives 65 Place
17 Revenues and costs 66 Integrated marketing mix
18 Profit and loss 67 Business operations and production
19 Break-even charts 68 Business operations and technology
20 Using break-even 69 Managing stock
21 Calculating cash flow 70 Suppliers and procurement
22 The importance of cash to a business 71 Managing quality
23 Short-term sources of finance 72 Customer service and the sales process
24 Long-term sources of finance 73 Gross and net profit
25 Limited liability 74 Profit margins and ARR
26 Types of business ownership 75 Interpreting quantitative business data
27 Franchising 76 Limitations of quantitative data
28 Business location 77 Organisational structures
29 The marketing mix 78 The importance of effective communication
30 Influences on the marketing mix 79 Different ways of working
31 The business plan 80 Different job roles and responsibilities
32 The nature of business planning 81 Effective recruitment
33 Stakeholders 82 Developing employees
34 Stakeholder conflict 83 The importance of training
35 Technology and business 84 Motivating employees 1
36 Principles of consumer law 85 Motivating employees 2
37 Principles of employment law 86 Exam skills: Case study
38 The economy and business 87 Exam skills: Short-answer questions
39 Unemployment and inflation 88 Exam skills: ‘Calculate’ questions
40 Interest rates 89 Exam skills: ‘Analyse’ questions
41 Exchange rates 90 Exam skills: ‘Justify’ questions
42 External influences 91 Exam skills: ‘Evaluate’ questions
43 Exam skills: Case study 92 Formulae
44 Exam skills: Short-answer questions 1 93 Glossary
45 Exam skills: Short-answer questions 2 95 Answers
46 Exam skills: ‘Analyse’ questions Pearson Edexcel publishes Sample Assessment Material
47 Exam skills: ‘Justify’ questions and the Specification on its website. This is the official
48 Exam skills: ‘Evaluate’ questions content and this book should be used in conjunction
with it. The questions in Now try this have been
written to help you practise every topic in the book.
Terms in blue can be found in a glossary on page 93. Remember: the real exam questions may not look like this.
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Enter prise
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The dynamic eurship

nature of business
Businesses operate in dynamic markets. New opportunities arise and new businesses
and business ideas are created. Wherever there is a need for a product or service, an
entrepreneur may take the chance to meet that need with a new business venture.
Changing technology Changing consumer needs
As new technology develops, new business Society is constantly changing. These changes
opportunities arise. New technology can lead to consumers spending their money in
often improve products and services, and different ways. New business opportunities
make them more desirable in a number can arise because of new consumer wants and
of ways. New technology can: needs caused by:
• make products and services faster • changes in fashions
• make products smaller (more compact) • changes in the economy
• make products and services cheaper • changes in national demographics
• make products and services easier • changes in lifestyle, such as the way
to use consumers spend their leisure time
• make products safer. • changes in technology.

Obsolescence
The introduction of new technology and the changing nature of consumer needs means that
products and services can become obsolete very quickly. Many products are designed to
only last a short time, and consumers are encouraged to buy newer and improved versions
of these products. This is called planned obsolescence.

Worked examp
le
2
Give two examples of the way in which new business
ideas can be generated. (2 marks)
1 A new idea, such as a new invention.
2 Developed from existing ideas, such as by
making slight changes and improvements to
an existing product or service (innovation).

ly one
can be unique (the on
Digital music downloads are an example A new business venture
of how new technology makes products other existing ideas.
and services obsolete. Physical CD sales of its kind) or similar to
in the USA dropped by more than 75%
between 2005 and 2014. Level of uniqueness: arket big
Left highly unique Unoccupied Entrepreneur M
ca n enough
Right generic business gap in the thinks they
be tt er fo r another
market do it
competitor

Now try this

1 Explain one opportunity that the introduction of new technology creates for a business. (3 marks)

4 2 Explain one way in which a gap in the market creates a business opportunity. (3 marks)

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Risk and reward
Before an entrepreneur starts their own business or sets up their own company, they will
consider the risks and rewards associated with their business venture. Some businesses may
be considered higher risk than others, but they may also offer greater rewards to their owners.
Working out the risk
Risk is worked out by considering the probability of a negative outcome occurring and the
impact of the negative outcome. Starting any business will involve taking a risk because
there are so many unknown factors that affect long-term business success.
Rewards Risks
There are both
Business success – personal Business failure – through poor cash rewards and
satisfaction, excellent products/services, flow, fall in sales revenue or the action risks associated
growth, and awards and recognition of competitors with starting a
Starting a business

business.

Profit – where revenue Financial loss – an owner may lose the

exceeds costs over a capital they invest in the business if it fails.
period of time This could include their personal belongings
if the business has unlimited liability

Independence – many business owners Lack of security – not working for someone
will value the freedom of working for else means no guaranteed income, sick pay
themselves over working for someone else or holidays

How can risk be reduced? What makes some businesses riskier

• Carry out detailed market research than others?
(you can revise market research on page 8). • Seasonal demand, such as for ice cream.
• Produce a business plan (you can revise • A small market.
business plans on pages 31–32).
• A highly competitive market with lots of
• Ensure that the business is competitive competitors.
(you can revise competition on pages 13–14).
• An owner who knows little about the
• Raise sufficient start-up finance (you can product or market.
revise finance on pages 23–24).

at could lead
Consider the factors th
Worked examp
le
3 to business failure. Alt
might be a personal do
hough Option D
wnside for Sonia,
business failure.
Sonia Fletcher set up as a sole trader selling cakes made it is not likely to cause
answer as it is a
from organic ingredients. Which one of the following is Option B is the correct
an example of a risk for Sonia’s business? risk for the business.
Select one answer:
A Sonia has estimated that demand will rise over the next six months
✗ B Sonia has calculated a negative cash flow for August
C Sonia is anticipating that the cost of flour will fall next year
D Sonia has estimated that she will need to work an extra 5 hours per week to meet demand for her products
 (1 mark)

Now try this 4

Explain one reason why someone might want to set up their own business. (3 marks)

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The role of eurship

business enterprise
A business or enterprise is a person or organisation with the purpose of producing
goods and services to meet the needs of customers. A business might produce its own
goods or buy them from a supplier and sell them to customers.
What businesses do
SUPPLIERS PRODUCTION CUSTOMERS / CONSUMERS

BUY SELL
FROM BUSINESSES TO

Supplier: a business that Production: using raw materials, labour Customer: a person or organisation
sells (supplies) products and machinery to make products. that buys the product or service.
to another business. Consumer: the person that uses
(consumes) the product.
The purpose of all products and services is to meet the needs of customers, often in
order to make a profit.

Adding value £100 £30

Value
Successful businesses will be able to add value to their products and added:
what
services. A business can add value to its product by lowering variable the business
adds
costs or adding something that will make customers willing to pay a
£70
higher price.
More convenience Unique selling point Price
Variable
Adding value
cost
is very closely
Ways to add value Better design
linked to profit.
Greater speed
of service
Branding
Improved quality

Worked examp
le
6 B and E are things that customers
would
B would
Which two of the following might be the best ways in which an be willing to pay more for. Option
and
oven-cleaning business could add value to its products? provide a better all-round service,
e. The
Select two answers: (2 marks) Option E would improve convenienc
the
A Employing an accountant to manage cash flow other three options might improve
business but would not add value.
✗ B O ffering free after-care visits to check customer satisfaction
C Making sure they have an excellent relationship with
the bank
D Buying a van with the name of the company clearly
Now try this 6
written on the side
Discuss why a business may find
✗ E P roviding a weekend service so that customers do not it difficult to add value to its
need time off work
products or services. (6 marks)

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The importance
of added value
Adding value is important to a business for a number of reasons. A business must decide
how best to combine the features of its products to add value.
The benefits of adding value Unique selling point
The added value of a product goes A unique selling point (USP) is another
towards paying off a company’s fixed costs. way to add value to a product. A USP will
The higher the added value, the sooner also help a business compete.
costs can be paid off and the quicker a
business will make a profit. The more value Developing a USP can be aided
a business can add to its products, the through understanding customer
more chance the business has of success, needs and market mapping.
survival and long-term growth.

Well-designed
Mix and match packaging Convenient
Most products combine a range Unique combination
shop
of ingredients
of features to add value and location
improve competitiveness.
The most successful products are Freshly
the ones that are able to keep Friendly handmade
costs down as they add new service
features or benefits. Good-quality Free drink with Organic
fillings every sandwich bread

Option C will add value

through raising after-
sales service, and Optio
n D will add value
through a stronger bran
Worked examp
le
1 willing to pay more for
d image. Customers are
these things.

Which two of the following are strategies that a professional gardener might use to help their
business achieve high levels of added value? Select two answers: (2 marks)
A Ensure a profit is made on every ✗ D D
 evelop a strong brand awareness
job completed in the local area
B Give price discounts E Compare the prices of competitors every month
✗ C V
 isit every customer 48 hours after work is
completed to take feedback

Now try this 1

Which one of the following is most likely to be a reason why a business would try to add value to its products?
Select one answer: (1 mark)
A To increase the materials it buys
B To add a USP
C To differentiate its product
D To improve its chances of survival in the long term

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entrepreneurship
An entrepreneur is a person who owns and runs their own business. Entrepreneurs are
risk-takers who have an initial idea and the willingness and confidence to see it through.
What do entrepreneurs do? Risk-taking Showing initiative

Have an idea Take a risk Organise the

resources to set
up a business Enterprise skills
Establish
and grow a
successful Make business
business decisions Employ people
Willingness to undertake
a new venture
Approximately 40% of
businesses fail
within their first four ye
ars of trading.
Entrepreneurs innovate
Entrepreneurs create new products through invention and innovation.

££
£
INVENTION INNOVATION

RESEARCH AND POTENTIAL PRODUCTS PRODUCTS READY TO

DEVELOPMENT AND PROCESSES SELL TO CUSTOMERS

Benefits to the economy Worked examp

le
1
Entrepreneurs benefit the economy by:
• creating products and services to Which two of the following are key features
meet people’s needs of enterprise?
Select two answers:  (2 marks)
• creating jobs
A Employing at least one worker
• generating economic activity through B Having the right qualifications to run
consumer spending a business
• paying tax to the government ✗ C Being prepared to take risks
• exporting goods abroad. ✗ D Having a willingness to take on a new venture
E Registering as a private limited company
When answering questions about
enterprise, remember that it
involves the things required to sta
rt a new business.

Now try this 1

Which two of the following are key enterprise skills? Select two answers:  (2 marks)
A A willingness to take risks
B A willingness to employ at least five workers
C A willingness to take the initiative
D A willingness to follow a course of study in business
E The ability to raise finance

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Customer needs 1
If a business is to make products and services that are desirable and profitable, they
must be able to meet customer needs successfully. A business that can meet customer
needs will encourage repeat purchase and attract new customers.
What customers want
When making decisions about products and services,
customers will make a decision based on the balance Choice

of the four factors shown in the diagram. All of

the factors are linked through price, because a
business’s ability to provide a product at the right
Price
price will depend on the level at which it meets
the other factors. For example, improving the
standard of product quality by using better-quality
raw materials may increase costs, which will have an Quality Convenience
effect on the price.

Meeting customer needs

Customer need Example
Price Charging a price that is 20% lower than competitors’ prices
Choice A restaurant serving a menu that offers more than 30 different dishes
Convenience A business offering customers next-day delivery on all items
Quality A clothes manufacturer using only the highest grade of cotton in all garments

Worked examp
le
4
Explain one reason why a business might sell a
wide range of products.  (3 marks) by
In this answer, the student starts
A business would sell a wide range of tom er needs.
identifying a reason linked to cus
products to give customers more choice. The student then goes on to exp
lain
If customers have more choice, it is a cho ice would
why providing customers with
more likely that they will find a product the reason
be beneficial. They have developed
that meets their needs. As a result, the pment.
with two linked strands of develo
business will increase its sales because You do not need to give context
in an
all customers will find something that ‘explain’ question.
they like.

Now try this 1

State one way that a business could meet customer needs through providing high-quality products.  (2 marks)

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Customer needs 2 y

A business cannot treat all of its customers the same way. Customers with similar needs
will be influenced in different ways by their personal circumstances and characteristics.
A business must understand the differing needs of its customers so that it can continue
to generate sales and survive.
Personal circumstances
Family needs Financial needs
Customers with children will People with different incomes
have different needs from a will choose to buy products and
couple with no children services at different price points

Understanding
Personal tastes and preferences customers Emotional needs
All customers have personal
Some customers may have
preferences based on style, colour,
strong emotional connections
function and personal taste
to certain brands and products

Customer needs and different products

A customer’s needs will differ for different
A – Customer
A – Customer
preference
preference B - Customer
B - Customer
preference
preference
types of products. In some cases, the for a flight
for to
a flight
Spainto Spain for a pair
for
ofahiking
pair of
boots
hiking boots
right price may be more important
than choice. In other circumstances, it may
be the other way around.
For example, a customer buying a short-
haul flight to Europe may value price and
convenience over quality or customer
service. However, the same customer
buying a different product, such as a
pair of hiking boots, may be willing to
Choice

Price
Choice
Convenience
Price
Customer
service
Convenience
Customer
service

Choice

Price
Choice
Convenience
Customer
Price
service
Convenience
Customer
service
Quality

Quality

Quality

Quality

pay a high price if they receive excellent

customer service (advice from a specialist)
and a high-quality pair of boots.

Worked examp
le
2 Now try this 2
Which two of the following are likely to be the Which one the following is a reason why customer
most effective methods that an office furniture service is important to the success of a small business?
business might use to meet customer needs? Select one answer:  (1 mark)
Select two answers: (2 marks)
A Customers are the ones who add value
A Securing repeat purchases by customers
B A small business wants to get repeat purchases
✗ B Fulfilling customer orders quickly C Customers will buy a product if the price is right
C Setting non-financial objectives
D It has to meet legal requirements
✗ D Selling furniture at a competitive price
E Advertising on local radio

Option B
Only Options B and D have anything to do with meeting customer needs.
Option D is an
is an example of convenience and providing good customer service.
example of meeting customer needs through appropriate pricing.

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The role of
market research
A business will carry out market research appropriate to its size and the nature of
its market. The purpose of market research is to help a business to understand its
customers, competitors and the market in which it operates, in order to make informed
decisions about its products and services.
Identify gaps in the
market or opportunities Identify and understand
Identify and understand competitors
customer needs

The purpose of
market research
Understand how well the business Understand trends in
is doing, such as customers’ the market, such as
opinions of its products Inform business decisions and market growth
reduce the risk associated with
making business decisions

Worked examp
le
2
Lisa Gallagher believes there is a growing market for gardening services. She has conducted some market
research to test her idea and has summarised her findings.
Type of household Percentage
Service 1
Single – no children 7 10%
Single – with children 11 Service 2
12%
Single – pensioner 28 Service 3
49%
Couple – no children 9
29% Combination of
Couple – with children 31 the 3 types
Couple – pensioners 14 Figure 1 of service
Table 1
Study Table 1 and Figure 1. According to this information, QuantitativeMake notes
which two conclusions can Lisa draw from the data? skills on what the
Select two answers: (3 marks) data tells you. It is important
✗ A 1 00% more single pensioners than pensioner couples are that you interpret the data
interested in Lisa’s business correctly before you begin to
B L isa should not offer Services 2 or 3 as there is no demand choose the correct answers.
C Her main two segments are couples with no children and Once you are sure that you
singles with children understand the data, eliminate
✗ D M ore than half of people prefer something other the options that you know are
than Service 1 incorrect. Why are Options B,
E C ouples with children are more likely to use Service 1 C and E incorrect?

Now try this 6

Discuss why a business may conduct extensive market research before it begins trading. (6 marks)

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Types of market y

research
Primary research (field research) is collecting Secondary research (desk research) is
information that did not exist before. This first- the process of gathering secondary data,
hand contact with customers is valuable to a which is information that already exists.
business in understanding its market. Internet sites
Focus groups
Sales data Local newspapers
Observations
Surveys
Secondary
Primary
research
research
Experiments Telephone Government
directories reports
Social media Questionnaires Market reports

• More accurate • More general

• Up to date • Less time-consuming
• Specific to needs • Effective at collecting quantitative data
• Effective at collecting qualitative data
Many businesses use social media as a cheap way to
• Direct customer contact
collect information on market trends, customer opinions
Market research questions and the actions of their competitors.

Focus on… Example questions

Customers • What do our customers value?
• What benefits are offered by
Worked examp
le
3
our product? Which two of the following are the benefits of
• How can we improve our products? conducting secondary market research instead of
• How much are our customers primary market research? (2 marks)
willing to pay?
Select two answers:
Competitors • Who are our closest rivals?
• What is their market share?
A It adds value to the products
• What makes them competitive? ✗ B I t is less time-consuming
Market • What is the price of existing ✗ C I t offers a wider range of information
products or services? D It is more specific to the target market
• How many people are buying E It will lower the costs of production
these products?
• Is the market growing or shrinking?
Ways of collecting market research data include:
• What are the latest trends?
• multiple-choice questions
• yes/no questions
• sliding scales such as 1–10
• customer comments.
Now try this 2
Which one of the following would not be an appropriate method of market research for a new
small business? Select one answer: (1 mark)
A Employing a specialist market research company to carry out a survey of 10 000 people
B Using published statistics about market trends
C Asking customers to fill in a short questionnaire on the premises
D Conducting an interview

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Market research data
There are two categories of market research data:
• qualitative data – information about people’s opinions, judgements and attitudes
• quantitative data – data that can be expressed as numbers and statistically analysed.
Effective market research is likely
Size and scale to link quantitative and qualitative
Market research can be expensive and small information together. For example,
businesses may only do a little. Larger businesses it would help a business understand
may pay a market research company to carry a 20% fall in customer satisfaction
out extensive primary research. The greater the ratings if a focus group revealed
sample size (proportion of the population) used, that this was due to the layout of
the more accurate the research will be. the business’s new website.

Bias Reliability
Bias is the inclination to agree with an idea. Market research In order to make good
data can be biased if customers give the answers that they business decisions, research
think the business wants them to give, for example when a data should be reliable – it
small business owner collects the opinions of family. Bias also should come from a
occurs by not surveying a representative sample of people. representative sample and
For example, a cafe owner will receive different feedback on his the questions should enable
menu from people eating lunch to those just wanting a drink, so people to give accurate and
only asking those people will result in biased data. relevant answers.
✗ ✓
with the
This leads the customer to agree Don’t you agree that this Tick your colour preference
biased.
statement so the data would be product should only be for this product.
available in black? Yes/No red  green  black
answer, so
People with 0 or 3+ pets cannot How many pets do you have? How many pets do you have?
the data would be inaccurate. 1  2  3 0  1–2  3+

Worked examp
le
5 Other methods include
interviews, consumer pa
nels
Apple produces home electronics, including the iPad and iPhone, for or questionnaires/surve
ys.
the mass market. Product design is an important part of its success.
(a) Give one method of collecting qualitative market research. (1 mark)
a
Focus groups This is a good start to
n.
(b) Analyse the impact on Apple of using qualitative market research to 9-mark ‘analyse’ questio
w
improve its understanding of customer needs. (9 marks) The student should no
is
Qualitative research will give Apple information about whether develop their answer. Th
st tw o
consumers think their computers, iPads and iPhones are may include at lea
ed
good-quality products. This will enable Apple to change their different reasons appli
Ap ple .
product design so that consumers will pay more. to the context of

Now try this

1 Define the term ‘market research’.  (1 mark)

1 2 Give one way in which a business might collect quantitative market research data. (1 mark)
3 Explain one way in which market research data might benefit a business. (3 marks)
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Market segmentation y

A market segment is a group of buyers with similar characteristics and buying habits.
Segmenting a market allows a business to understand its customer needs and to target its
customers better.
How to segment a market In order to accurately segment its
market, a business must have a good
A market can be segmented in many ways, based
understanding of its customer needs
on the characteristics and needs of customers.
through effective market research.
Age – e.g. 18–25
Gender – e.g. female

Income – e.g. socio-

economic group
Demographics –
e.g. young couple Location –
Lifestyle – e.g. Newcastle
e.g. adventurous

Benefits of segmentation Limitations of segmentation

Market segmentation allows a business to: Targeting a range of different customers
meet specific customer needs with different products and services can
differentiate its products be costly.
focus on a specific group of customers Focusing on one group of customers
can cause a business to miss another
target its marketing activity opportunity.
develop a unique brand image Customer characteristics change over
build close customer relationships. time, such as lifestyle, income
and demographics.
Businesses have to continually upd
ate their understanding of
their customers as customer nee
ds change over time.

Worked examp
le
4
Explain one way in which effective marketing can Make sure that you:
help improve the products of a business. (3 marks) • identify one way (for example,
If a business understands its customers’ needs, product development)
its products and services can be developed to • make two further expansion
meet these needs. This means that the products points about the way that
will be more attractive and desirable, leading to a you have identified.
greater number of sales.

Now try this

1 Define the term ‘market segment’. (1 mark)
2 Explain one reason why a business may choose to segment its market. (3 marks)
2-4

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Market mapping
Market mapping helps businesses to position their products by identifying gaps in the market.
Market maps High quality Key
A market map is a diagram that can be used Marco’s Cafe
to position and compare products in a The Beach Hut
The Village Cafe
market. It is also used to identify gaps in Low High The delicatessen
the market, which are opportunities where price price
Gap in the market
customer needs are not being met. A market
map will compare businesses based on two
A market map showing a
variables, such as price and quality. potential gap in the market
Low quality
for a new cafe business.

Benefits of market mapping

Head-to-head competition
Helps to identify potential gaps in a
market (opportunities). There doesn’t always have to
be a gap in the market for a
Helps businesses to identify their closest rivals. business to be successful.
Supports market segmentation. Businesses can target the same
Helps businesses to make decisions about customers as other businesses
marketing and positioning its brand. and still succeed:
Limitations of market maps if there is enough demand
in the market (enough
Based on opinions and perceptions, rather than
customers)
on accurate data.
if the business is able to
Compares businesses based on only two
meet customer needs
variables, which is simplistic.
better than its competitors
Can be difficult to identify the most (by offering more choice or
appropriate variables. better customer service).

Worked examp
le
2
A High Price B According to the market map, which one Option D
Gloria’s Styles Tribes Arkadia of the following describes a gap in the is the only
Stylistic Toni and Guy market? (1 mark) quadrant
Debonair Belize Select one answer:
Ashes where there
A H igh price / traditional are no other
Traditional Fashion
B H igh price / fashion businesses.
X-men Barber Shop
C L ow price / traditional
Hair Today
✗ D Low price / fashion
Grade One Men’s Cuts
C Low Price D

Now try this 4

Which two of the following are most likely to be important in spotting a new business
opportunity in the cycling market? Select two answers:  (2 marks)
A Being able to produce a product cheaply D Identifying the possible competitors
B Recognising a new gap in the market E Having a large amount of personal savings
C Being a keen cyclist
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Spotting a
busin
oppor tunit ess
Competition y

A business might use a number of criteria to analyse the strengths and weaknesses of
its competition in order to adjust its business offering and differentiate its products
and services.
Better customer
Wider product range service Stronger
brand image

More convenient
Lower prices Ways to compete location

Better design Higher quality

Differentiation
How to differentiate products
Product differentiation is about
making a product different from others Instead of competing head-to-head,
in some way. It helps businesses: businesses can try to differentiate
their products.
• to position their products and target
different market segments Head-to-head competition

• to gain an advantage over rivals when BUSINESS PRICE PRICE COMPETITOR
faced with competition.
It allows consumers to see clearly that Differentiation

their needs are being met more effectively

BUSINESS COMPETITOR
by one product than by another.

Worked examp
le
2
Which two of the following methods are mostly likely to differentiate a driving school from Options A and
its rivals? C are ways
Select two answers:  (2 marks) in which a
✗ A P roviding high-quality tuition D O
 perating in a competitive business can
B Operating as a sole trader market differentiate
✗ C P roviding a personalised service E P
 roviding a service for the what it does.
community

Now try this 2

Which two are the most likely methods that a small independent music store might use to compete with a
large supermarket chain that also sells CDs?
Select two answers:  (2 marks)
A Lower its prices below that of the supermarket
B Launch an advertising campaign on national television
C Provide an ordering service for hard-to-find CDs for their customers
D Open up two new stores in the town
E Focus on improving the quality of customer servicevv

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Spotting a nity
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Competitive markets
What is a competitive market?
A market is competitive when there are a large number of
businesses relative to the number of potential customers.
Competition is also high in markets where businesses sell
very similar products and services that are difficult
to differentiate.

difference
The market for sugar is highly competitive because there is little
n one produce r’s sugar and another ’s. This means that busines ses
betwee
may also be conside red. On the
mainly compete on price, although quality
and confect ionary product s can be highly differen tiated,
other hand, cakes
allowing businesses to compete in different ways.

Competition and business Drawbacks of highly competitive

decision-making markets
Some of the decisions that a business A business that operates in a highly
might make in a highly competitive competitive market might have to:
market include: • lower prices in order to compete
• improving efficiency • accept lower profit margins
• finding ways to improve competitiveness • cut back on expenditure
(see page 13 to revise competition)
• be careful about how and when it expands
• differentiating its products and services • monitor its competitors closely.
• lowering its prices
• giving customers special offers
Consumers benefit from competition as it encourages
• cutting costs. businesses to lower their prices and also to improve
quality and customer service.

Worked examp
le
4 The student has explained how pric
e
Explain one reason why a business might decide to lower the is one way that a business might
price of its products. (3 marks) compete against rival businesses
.
An ‘explain’ question does not
A business might decide to lower its prices in order
require you to analyse the benefit
to remain competitive against other businesses. s
and drawbacks (e.g. the fact that
If a business lowers its prices, it will seem more the
business might also lower its pro
appealing to customers compared to other fit
margins by reducing its prices).
alternatives. As a result, customers may choose it
over rivals and its sales revenue may increase.

Now try this

1 State one possible method a business could use to differentiate its product. (1 mark)
2 Explain one reason why a differentiated product might benefit a business.  (3 marks)
1-4

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Aims and objectives ractice

All businesses set objectives. Sometimes these are financial objectives, which can be
expressed in money terms. Businesses also have non-financial objectives. These are more
personal and may involve helping others.
Most businesses will
The objectives hierarchy
have an overarching
Aims are the general goals that a business sets. Aims aim that is supported
An aim can be the purpose for a business’s existence. by a number of SMART
Objectives are more specific than aims, but Objective Objective Objective
objectives, often
they contribute to a business achieving its aims. 1 2 3
specific to functions of
Objectives can be either financial or non-financial. the business.

Typical objectives for a start-up

Financial objectives

Survival Sales and Profit Market Financial

sales revenue share security

Non-financial objectives

Personal Independence Challenge Social benefits Customer Business

satisfaction and control or goals satisfaction awards and
recognition

Worked examp
le
2 Both Option A and Option E are
Which two of the following are the most likely reasons why an examples of non-financial objectives
.
individual would want to start a business? Option A involves helping others,
while
Select two answers:  (2 marks) Option E is about independence
and
✗ A T o use the profits of a business to make a difference control (being your own boss). Op
tions
B To work fewer hours each week B–D are not really viable objectives
for
C To avoid paying income tax starting a business.
D To show their boss that they are as good as them
✗ E T o control their own future

Now try this 2

Which one of the following is the most likely reason why Sonia decided to set up a business?
Select one answer:  (1 mark)
A She wanted to have more spare time
B She wanted to have more independence when making business decisions
C She wanted to make a guaranteed profit
D She wanted to reduce the number of risks she had to take

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Differing aims and
objectives
As a business develops and grows, so do the ambitions of the entrepreneur or owner who runs it.
This means that different businesses have different aims and objectives. It also means that the aims
and objectives of a business change, depending on its current stage of development.

Business A Business B

Business A has been running for six months. Business B is a chain of 15 stores
It has started to gather a loyal customer nationwide. It has been established for
base and to receive repeat purchases. 12 years and in the last five years has
Initial customer reviews are positive. become the second largest of its type in
Business A’s objectives are to: the market. It is a public limited company
• survive (PLC). Turn to page 50 for more on PLCs
• have independence and control Business B’s objectives are to:
• achieve 100% customer satisfaction • become market leader
• achieve financial security. • achieve a sales revenue of £200 million
• donate 1% of all profits to charity.

These objectives are appropriate for Business These objectives are appropriate for Business B
A because many small businesses fail within the because a large successful business may have a
first few years of opening. The owner wants the realistic ambition to become market leader. Its
independence of running their own business. success over the last 12 years and its shareholders
Customer satisfaction is very important if the will mean that the business will have profit targets. As
business is to grow. a large business, it may also wish to give something
back to society by donating to charity.

Worked examp
le
4 The student has
Explain one reason why a business would set financial objectives. (3 marks) explained why financial
performance is important
A business would set a financial objective because most
to a business and how a
businesses are judged on their financial success. If the objective
financial objective linked
is to increase revenue as a percentage of sales (units) then this
to revenue would to help
would be a quantifiable objective and easy to measure. Increasing
achieve this.
revenue increases the likelihood of the business making a profit.

Now try this

1 Give one example of a non-financial objective. (1 mark)
2 Define the term ‘market share’. (1 mark)
1-3
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Revenues and costs ractice

A business must understand the difference between the price it charges to customers and
the cost of producing its products. If it knows how many products it sells, it can calculate
its total revenue and its total costs. It can then calculate profit.

Quantitative Fixed and variable costs

skills  Calculating revenue
Fixed costs do not vary with
Revenue, sales revenue or turnover is the the output produced by a
amount of income received from selling goods business, e.g. business rates.
or services over a period of time. It can be Variable costs change directly
calculated using the formula: with the number of products made,
  Revenue = Price × Quantity
!
LEARN IT
e.g. raw materials.
 Variable costs
R N I T !
£ £ = £ × LEA = Cost of one
£ unit × Quantity
produced

Fixed costs, e.g.

Quantitative
 Total costs business rates
skills

Total costs are all the costs of a business. TC = +

It can be calculated using the formula:  EARN L IT!
Total costs (TC) = Total fixed costs (TFC) + Total variable costs (TVC) Variable
£900 = £400 + £500 = £400 + (£5 × 100) costs,
e.g. wages

Worked examp
le
2
Hancock’s is a small pottery business that specialises in garden plant
pots. It has the following financial information for one month.
Number of pots produced and sold: 150
Average price per pot: £10 Fixed costs per month: £500
Quantitative Be careful.
Variable costs per pot: £2 skills
You could
Which one of the following represents the total costs for Hancock’s arrive at an incorrect answer
during the month? to this question if you use
Select one answer:  (1 mark) the numbers incorrectly in
A £450 ✗ C £
 800 your calculation.
B £650 D £1500

Now try this 6

October November
The following table shows the costs, revenues and
profits of a cleaning company for a two-month period. Revenue £14 000 £12 000
Complete the table with the four missing figures. Fixed costs £2000 £2000
 (4 marks) Variable costs (i) (iii)
Total costs £9000 (iv)
Profit (ii) £5000

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Profit and loss
A business must be able to calculate whether it is making a profit or loss. It must also
understand how making a profit or loss can have an impact on the business and its owners.
Profit as an objective
Quantitative
skills Profit and loss Profit is the objective of
Profit occurs when revenues of a business are greater many businesses because
than its total costs. If a business’s costs are greater it allows a business to:
than its revenues then it will make a loss. Profit or loss • survive
can be calculated using the formula: • reinvest profits
 Profit = Sales revenue − Cost for expansion
R N I T !
LEA of sales • provide security
There are two and savings
Profit or loss = £ − different kinds of • reward employees
£ profit: gross profit
£ • generate wealth for
and net profit. You the owner.
can revise these Profit can also act as
£1000 – £900 = £100 profit on page 73. an incentive to start
the business.

Interest rates
Quantitative
skills Calculating interest on loans
Interest is the %
In your exam, you may be required to calculate the total reward for saving
interest to be paid on a loan. Saving £
Interest (on loans) % =
R N I T !
LEA Total repayment – Borrowed amount
× 100
B o r r o wing £
Borrowed amount Interest is the %
cost of borrowing

Worked examp
le
4
Which two of the following actions is most likely to increase a pottery Quantitative
skills
business’s profit, assuming that it sells the same number of pots each month?
Select two answers: (3 marks) Options B, C and D
✗ A B
 uy cheaper raw materials to C B uy more expensive raw would actually increase
make its products materials to make its pots the business’s costs.
B Increase the number of D I ncrease advertising Options A and E would
workers employed over expenditure lower costs.
the weekend ✗ E Relocate to cheaper premises

Now try this 6

A business spent: The business now buys its raw materials 10% more cheaply from a
new supplier. What effect will this have on profit?
• £10 000 on raw materials
Select one answer: (1 mark)
• £30 000 on fixed costs
The profit level will:
• £7500 on other variable costs
A Increase by £2500 C Increase from £2500 to £3500
and had a turnover of £50 000.
B Fall by £2500 D Increase by 10%
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Break-even charts ractice

Break-even is the level of output at which a business’s revenue covers its total costs. At
this point the business is making neither a loss nor a profit. Break-even is an important
financial concept as it allows a business to make important decisions about prices, sales
volumes and costs.
Total revenue is the
Total revenue amount of money earne
The point on the graph
Revenue/costs d
Total costs by a business from sellin
where total costs and g
products. It increases
Profit
revenue meet is the break- Break-even point directly with the numb
even point or break-even er
of products sold.
level of output.
When total revenue
exceeds the break-even Loss Fixed costs Total costs are the
point, the business makes sum of all the costs at
a profit. When total any level of output.
Margin
revenue falls below the of
break-even point, the safety The fixed costs line is
business makes a loss. horizontal because fixed
Output costs do not change at
any level of output.

! The margin of safety is

LEARN IT
Quantitative
skills  Formulae to know
Revenue = Price × Quantity the amount of output
el
between the actual lev
Total costs (TC) = TFC (total fixed costs) + TVC (total ofi t is
of output where pr
variable costs)
Fixed cost being made and the
Break-even point in units = (Sales price – Variable cost) break-even level of outp
ut.
Break-even point in revenue / costs = This is how much
Break-even point in units × Sales price production could fall
arts
before the business st
to make a loss.

Worked examp
le
5
Using the information below, calculate Sony’s break-even point when its Quantitative
skills
PlayStation 4 console was priced at £300. You are advised to show your workings.
Fixed costs: £2 400 000 Make sure you:
Variable costs: £140 per console  (2 marks) • show accurate
Break-even = Total fixed costs ÷ (Price – Variable cost per item). workings
Break-even = £2 400 000 ÷ (£300 – £140) • calculate the
Break-even = 15 000 consoles correct answer.

Now try this 5

Using the information below, calculate the level of profit or loss Sony would make if it sold 20 000
PlayStation 4 consoles at £300 each. You are advised to show your workings.
Fixed costs: £2 400 000   Variable costs: £140 per console (2 marks)

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Using break-even
Break-even analysis is a useful tool to help a business make decisions, set targets and plan
for the future.
Break-even analysis is a useful tool for Lowering the break-even point
answering ‘What if?’ questions such as: Break-even analysis can identify strategies
what would be the impact of an increase in for lowering the break-even point and
variable costs on profit? A fall in fixed or increasing profit.
variable costs or an increase in price is likely
to lower the break-even point. Revenue / costs
(£000)
30 Total revenue
Increase price
Revenue / costs
What if variable Lower
(£000)
costs increase variable
30 Total revenue
by 80p? 20 costs

Total costs
Total costs
20
10 Fixed costs
Lower
Fixed costs fixed
costs
10
0
Break-even 0 200 400 600 800 1000 1200
point would Output (number of units)
rise A business can only lower the break-even point successfully so long
0
as productivity, quality and demand are not compromised. For example,
0 200 400 600 800 1000 1200
although increasing price will lower the break-even point, some
Output (number of units) customers may be put off and choose a product from a competitor.

Quantitative Caution! The concept

skills  Interpreting break-even charts of break-even assumes
The break-even point: where the total revenue and total that a business will
costs lines intersect, read the number of units required to sell all the products
break even from the x-axis (e.g. 1000 units). it makes. In reality, if
The margin of safety: subtract the break-even point (in a business increases
units) from the actual or predicted level of output/sales price it will lower the
(e.g. 700 units). break-even point, but
Actual or might deter customers
N I T ! Margin of Break-even
LEAR = budgeted – from buying.
safety sales
sales

Worked examp
le
5 Now try this
Discuss the reasons why a business might use a break-even chart. A business is using a break-even
 (6 marks) chart to examine the effect of a
When launching a new product, a business could use a reduction in the price of
break-even chart to identify the number of units it must its product.
sell in order to cover its costs. Using this information, 1 State one problem a business
a business can then make decisions on how many units 1 may face as a result of
reducing the price.  (1 mark)
it will need to produce and carry out market research
in order to understand whether it believes there is 2 Explain one limitation for a
sufficient demand to sell this number as a minimum… 3 business of using a
break-even chart. (3 marks)

This student has identified a reason and developed their explanation.

They could now go on to develop a second reason with further development.

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